It may be time to reconsider Consolidated Edison (ED). Year-over-year, their financials improved. What's more important to investors is its management developed a unique vision and now appears positioned to become the next generation utility.
ConEd is one of the nation's largest utility companies. It has an enterprise value of $28 billion and a market capitalization of $16 billion. Most of its assets are regulated, which means the company can expect to earn a prudent return on most of its assets.
ConEd is primarily an energy distribution company. It takes energy produced by others and distributes it to retail consumers. Unlike most other regulated utilities, ConEd distributes three types of energy: electricity, natural gas and steam.
Most of its business is electricity which accounts for 60% of revenue, followed by 23% from natural gas and 9% from steam. Remaining revenue comes from deregulated activities.
ConEd operates the largest steam distribution system in the U.S. According to its reports, ConEd produces and delivers steam to approximately 1,700 customers in Manhattan.
Over the last year, ConEd's financial profile improved. ConEd's price-earnings ratio is 13, which is one of lowest in the industry. Its 4.6% dividend has been steady and growing.
While ConEd's facts and figures are interesting, it is a typical utility story. What is not so typical is ConEd's vision. Like NRG Energy (NRG), ConEd's management has an interesting vision. They each envision a profitable utility system which will encourage energy efficiency and distributed generation.
ConEd is not threatened by energy efficiency or distributed generation. ConEd's wires will likely earn a fair return no matter how their customers connect to the system. The key is a strategy called decoupling.
The non-profit Regulatory Assistance Project describes decoupling as, "a tool intended to break the link between how much energy a utility delivers and the revenues it collects. Decoupling is used primarily to eliminate incentives that utilities have to increase profits by increasing [energy] sales, and the corresponding disincentives that they have to avoid reductions in sales."
While several states decoupled their electric or gas utilities, New York is one of 10 states that decoupled its electric and gas utilities. New Jersey only decoupled its gas utilities. ConEd has a footprint in both states, however most revenue comes from the New York operations.
Nevertheless, ConEd's approach has been atypical. According to GreenTechgrid, ConEd is not focused on the better-known wholesale programs where large customers offer up large loads to wholesale power markets in exchange for payments.
Instead, ConEd's programs are focused at the distribution level. Their goal is to ease distribution congestion within their system by using demand response and distributed generation. In fact, ConEd decided to become more aggressive with its demand response programs. They recently recalculated their demand response schedules value. The outcome is a doubling of payments over what they were a year ago.
It appears ConEd understands its system is becoming a backbone. Unlike traditional utilities that simply supply customers from generators to meters, ConEd's backbone can move energy services in two directions over the same wire. Consequently, ConEd can increase revenue by allowing responsible customers to connect to their backbone and access sophisticated services for a fee.
Looking forward, customers may seek a variety of value-added services. If a customer wants to take advantage of demand-response, they can buy service through ConEd. If a customer can generate its own electricity and wants to use net metering, they can buy service through ConEd. If customers create microgrids and they want to synchronize with the backbone, they can buy services through ConEd.
It appears ConEd finds opportunities where other utilities fear threats. In ConEd's world, solar, wind, energy efficiency have become opportunities. Over time, other utilities will learn from ConEd and develop similar opportunities.
In addition to decoupling, distribution utilities like ConEd, Northeast Utilities (NU), National Grid (NGG) and Pepco Holdings (POM) are state-regulated businesses. As regulated entities, their revenues are based on their costs. Cost recovery and modest returns are guaranteed by state governments. If a state wants customers to have access to additional services like demand response or distributed energy, they will require customers to pay their utilities their costs plus modest margin.
ConEd has its share of ups and downs. Over the last year, their stock is down by about 8%.
However, ConEd's long-term looks stable and promising. If it remains focused on its vision, ConEd will become an early adopter and lead the nation into the next generation utility. That new utility will be reliable and economic; it will own and operate sophisticated technologies. It will also reward shareholders.